The Rot Within, Part II: Inflation Is Not "Growth"

Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more.

The official policy of the Central Bank (Federal Reserve)/government is: inflation is necessary for "growth," i.e. economic expansion. The unstated reason for this official support of inflation is that it's easier for borrowers to service their debts as their income inflates.

To take an extreme example: let's say a homeowner has a mortgage of $100,000, an annual wage of $40,000 and annual mortgage payments of $10,000. At 100% annual inflation in both prices and wages, the home mortgage remains fixed at $100,000, the payment remains fixed at $10,000 but his earnings double to $80,000.

Where the mortgage payment initially took 25% of his earnings, now it only takes 12.5%. Yippee Skippy, the homeowner has an "extra" 12.5% of his earnings to support more consumption and debt: thanks to inflation, the homeowner can now buy a car on credit and use the "extra" 12.5% of earnings to pay the auto loan.

Central banks around the world seek inflation for another reason: the Keynesian Cargo Cult that dominates all central banks and governments believes with quasi-religious certainty that people respond to inflation by buying more stuff now rather than later: since prices will rise in the future, it makes sense to buy stuff now at "lower prices compared to next year's prices."

This is called bringing demand forward, as the demand to buy stuff is shifted from the future to the present.

In an economy dependent on debt-based consumption, inflation is absolutely essential to reduce the real costs of servicing old debts so households can afford to buy more stuff on credit. This is the basis of the Fed's insistence that inflation is equivalent to "growth"--inflation enables households to continue adding more debt to buy more stuff, as long as earnings inflate along with prices.

There are three problems with the Fed's "inflation is growth" scenario:

Deduct healthcare expenses and debt service, and what's left of wages for the rest of life's expenses is tanking: Courtesy of longtime correspondent B.C.:

Debating the real rate of inflation has become a financial parlor game because the real rate of inflation depends on the household's demographics, locale, expenses and income. Anyone paying the unsubsidized costs of healthcare or college tuition is experiencing crushing inflation (i.e. loss of purchasing power), while the low-income or retiree household receiving federal subsidies (i.e. no exposure to the real costs of higher education and healthcare) experiences low inflation.

But even the official measures of inflation reflect the destruction of purchasing power wrought by supposedly low inflation when wages are stagnant while costs keep rising:

Fed policies have inflated asset prices but left earned income in the ditch. Please read How Effective Have The Fed's QE Programs Been? (STA Wealth Management) for a fuller understanding of the perverse consequences of the Fed's "inflation is growth" policies.

Though nobody in official circles dares discuss it, the reality is inflation coupled with low interest rates reduces lenders' profit margins and increases systemic risk. In an economy in which wages are stagnating or declining in real terms while major expenses are galloping ever higher, the only way lenders can expand borrowing is to lend to marginal borrowers--households who would not qualify for loans under prudent risk management.

Lastly, there are limits on how much future demand can be brought forward when wages are declining. The Keynesian Cargo Cult has absolute faith in the notion that consumers faced with inflation will buy more today rather than pay more next year.

But the facts do not support the Keynesian Cargo Cult's misplaced faith. In Japan, where the central bank and government have struggled for years to generate price inflation as the means to "re-start growth," wages have fallen by 9% in real terms since 1997. (source: Voodoo Abenomics: Japan's Failed Comeback Plan Foreign Affairs)

When prices rise faster than incomes, people can't afford to buy as much. Soconsumption necessarily declines as prices go up and purchasing power goes down.There is nothing mysterious about this, but the Keynesian Cargo Cult is unmoved by mere fact and common sense.

Just as the Federal Reserve cannot directly force you to stick the needle of monetary heroin (debt) into your arm, it also can't force employers to pay employees more. Prices don't just rise for consumers; they rise for producers and employers as well. Every tick up in healthcare costs and producer costs increases the need for businesses to slash the one large expense they still control: payroll.

We all see the desperate gimmicks corporations are deploying to lower costs while keeping prices the same: reducing package sizes, putting less product in each package, selling "individual servings" at higher cost per ounce, lowering quality of the product, using more fillers, and so on.

The ultimate hubris of the Keynesian Cargo Cult (which includes the global economy's central banks) is the naive notion that they can manipulate an entire system with a few levers such that the desired outcome--and only the desired outcome--is the output.

The idea that you can change one input in an interconnected system of systems and only affect the one output you want is not just naive and simplistic: it requires a level of blindness and incompetence that is off the charts.

The idea that you can change one input in an interconnected system of systems and only affect the one output you want is not just naive and simplistic: it requires a level of blindness and incompetence that is off the charts.

Or perhaps an overwhelming criminal class that empowers and enriches itself by doing so?

Everyone (99.99999999%) loves inflation as the alternative is deflation, eventually if things deflate enough the human species disappears.

The "solution" is the same "solution" God invented long ago.... inflate to max potential and then deflate to max potential. My guess is 1-2 billion of the unfunded walking liabilities are going to have to go this cycle.

Yeah I am sure humans will be on this floating rock forever... humans do not have unlimited power, sorry buddy.

You should get out of the trailer every once in a while, you would then realize that nature is just a series of cycles. Millions of species have already went extinct, I am sure they all thought they would be around forever... forever is a very long time.

Some of you of you are going to have to go before other ones... which ones go first, going to be fun finding out.

Short term thinking pathologically-optimist human don't see debt as "bad". Debt is good. You know why? ________________________ (fill in pathologically optimistic bullshit about the wonderful future here. It's the same reason all the children are above average).

And companies love it because their sales keep going up..at least the price does...they may still sell the same amount of units..but with inflation the top line goes up...and of course CNBC jumps all over that as good numbers..they beat the street again they say...weee..to da moon

Today I had a discussion with a young kid who worked as a intern about the fact that he had to work for nothing and that it was slavery according to him.
In the back of my head he was right actually but I tried to convince him that he was being educated and that it will increase his outlook for a real job.
But actually, I already knew that the chances of him finding a job where pretty slim.
He also told me he already had send over 150 application letters but couldn't get a interview. That was sad... He had all the right education and look like every average kid out there.
So the older generation still has jobs and inflation will be hard but bearable if the luxury is cut.
But for those kids who make nearly nothing... Have nearly nothing... And to see prices rise...
This weekend we went to several parties my wife and me. We drank over 500 euro in alcohol alone with the both of us and it wasn't that crazy. 2 days of fun. 250 euro's per person.
How do kids still pay that?
I used to go out 4 days in a row when I was young! And I drank a shitload more than what I drank this weekend.
Kids are missing out on a lot these days... We all had 20 to 30K euro cars that looked like they came out of fast and furious. These days, kids are lucky if they can buy those crappy little budget cars.
I drove a 73 Cuda back than. Banks would go crazy if a young kid would go to the bank to loan that kind of money to buy one now! Back than it was like : here's a blanc cheque kid! Have fun!
Sad shit...

My education cost me about 75x what the older guys in my office with the same degrees paid. They graduated with little to no debt AND made the big bucks. I'm getting half of what they make with 10x the overhead - and I'm still doing half-ass OK. The younger kids now are just completely fucked.

I went to UCLA for undergrad in the very early eightees and it cost under 400 a quarter. I was talking with my sister's mother in law who went a few decades before me and was shocked how insanely little it cost. She paid for everything and could. Just another example of our thieves and the new scale of their theft. This system was designed to be a publicly accessible system. That is the fartherst from the truth now and a complet violation of the laws that established it.

If you call a monkey. professor, do you listen to his ramblings? What qualifies our present monkeys to run our economy? The flaw is the craving by the lazy non-thinkers for someone better than them to think for them. What qualifies a NY Times editor or a Wall Street Journal editor to certify the correctness of economic schemes? Whichever Snake Oil is promised to be the best should be chosen?

There is no Keynesian free lunch. There is no banker to be trusted. There is no one to trust with your earnings.

You are completely ignoring the most important human survival trait there is: the ability to manipulate other humans with bullshit.

Politics is simply a forum where the smartest-n-savviest people in society manipulate the dumbasses for fun-n-profit. The forum is created (in part) by "the media". The bullshit flows into the brains of the dumbasses (via the media), the dumbasses create soothing self-delusion, and - in exchange - give power to the smarter-n-savvier people as represented in loot.

Re: There is no Keynesian free lunch. There is no banker to be trusted. There is no one to trust with your earnings.

All true, except you confuse what the cargo cult says with what they actually know. Exactly zero of the top-level Keynesians believe their Keynesian claims are valid or correct. What they do is strictly to misdirect wealth into their hands in the short term, and cause the world economy to collapse so they can implement complete tyranny when that happens.

Keynesianism is more of a religion. Believers repeat the bullshit of the religion because they believe. Sure, the ones at the top, the smart-n-savvy people, are opportunistic sociopaths but they still believe.

Oh, enormous numbers of non-top-level Keynesians "believe" the Keynesian religion and propaganda. Absolutely true. But they don't "believe" because they've thought it through, they believe "on faith" (because any careful inspection will reveal their religion to be bogus).

But no way do the top-level predators believe the Keynesian BS. They're not that stupid. They're smart, crafty, diabolical... and self-conscious predators. They know they are predators, and are proud of it.

I can remember attending a Red Sox double header ( bleachers, natch), The Naked Eye, to China Town for dog/pork/cold tea unti 3AM, then stop Brockton for a good BJ ( I'm hammered and its like a chub skin tab. She gets me off.)
Started with 2 bills, hand coffee money in the morning.

The desired outcome is to separate you from the wealth you have so that the banks will end up with it. These bureaucrats want churn and volatility

and they don't care about the markets we live in and work in. The Neo-Keynesian wants any market activity as opposed to no market activity.

Foreclosure, bankruptcy, liquidations, mergers, all add up to systemic churn whether that is good or bad churn does not matter if the God damned markets are moving somehow. Neo-Keynesians would use the availability heuristic and pull the plug on the mainframe if they thought it would jump start the markets. Equilibrium Economics does not exactly work well under condition where nothing is stable and the meso levels of economics are wiped out. Clearly, major structural changes are required but the powers that be need to be pushed out of the decision making process entirely. Carp on all you want about the Neo-Keynesians but until we get rid of the unworkable system they will always be the meat puppets that sell to the Muppets.

This is why Karl Marx came to the conclusion that revolution was going to be the only end game available to select from en masse.

IMHO the revolution has started and shit will hit the fan eventually. It's just a matter of time.

Chuck's charts are quite compelling, but to me, the biggest rot is the American people themselves. The dumbing down and demoralization of our population have brought productivity and expectations to new lows. A very small percentage of the population can even understand this material, and even less have the means to take any action, even if they can comprehend.

It was always obvious that inflation is not growth, only fools fall for the crackpot economics promoted by central banks and governments.

"All prices, whether rising, falling, or constant, allow profitable production of goods and services to occur. Under falling prices in the long run (World Dollar) economy, both buying and selling prices fall, meaning the spread between them which profit depends on continues to exist. To give an example, the vibrant market for computers and information technology has combined rapid growth with constantly falling product prices. Also, the late nineteenth century saw the United States, during its two decades of falling prices under the gold-standard, experience high growth rates.

As the money supply only determines prices, and any prices allow profitable production to occur, the real factors that determine economic growth include capital accumulation, growing innovation, productivity growth, and an intensifying division of labour."

I have no doubt that the Fed has -never- stated that Inflation equals Growth.

They have stated that the market knows best. Which was wrong.

They have stated that moar cheap moneyto the "investors" in this economy will spur investment and growth. Which was wrong.

They have failed to acknowledge the phenomena of a liquidity trap and instead keep pumping money into the hands of people who just then hoard it. And that is VERY VERY wrong!

The FED Fuckers have implemented bank friendly policies to keep inflation low and they have ignored unemployment which happens to be double the healthy rate of unemployment (3.0%). And both of these things are linked and the policy is elitest and unacceptable and WRONG...exept, of course, to the goof balls jere on ZH.

You know, classical economics does link inflation to job growth, 'tis true, and it does so for very good reasons. You folks at ZH should pull your heads out of each other's butthols for a moment and understand why rising inflation rates tend to drive increased job growth. Unless, of course, you are too chicken to actually grasp some basic Econ101 factoids? Yep, you are aren't you? Too bad!

All I know is I don't buy anything I don't need. No debt. Do have a depreciating liability, car. Three years bank fighting so no payments. First plaintiff attys quit and now the plaintiff wants to substitute some other fraudster, Nationstar mortgage, a well know criminal outfit, as the brand new, all improved plaintiff. In discovery the current plaintiff admits to giving up the note and assigning away the mortgage. As if! Judge allowed me to file all the discovery. Pre trial confe rence this Friday. I'll take a dismissal with treble damages (unfair trade practices) with prejudice. They won't give that so will oppose the dismissal until they admit to submitting a forged note in the complaint.